Introduction

1.1 Contingent Valuation Method:

Contingent Valuation method was developed by Ciriacy-Wantrup (1947) is a survey technique
that attempts direct elicitation of
It does this by asking the respondents in the survey a question or a series of questions about how
much they value the good or service. People are asked directly to state or reveal what they are
willing to pay in order to gain or avoid some change in provision of a good or service.
Alternatively, they may be asked what they are willing to accept, to forego or tolerate a change.
A contingent market defines the good itself, the institutional context in which it would be
provided, and the way it would be financed. The situation the respondent is asked to value is

 

in a real market. Structured questions an
involving yes/no answers to questions regarding maximum willingness to pay. Econometric
techniques are then used on the survey results to find the mean bid values of willingness to pay.
Over the last two decades interest in CVM has increased for a number of reasons (Carson, 2000).

-

     
      
 
Second, the evidence available suggests that estimates obtained from careful and well-designed,
properly executed surveys appear to be as good as estimates obtained from other methods.
Thirdly, the design, analysis and interpretation of surveys have improved greatly with advances
in scientific sampling theory, benefit estimation theory, computerised data management and
public opinion polling.
Contingent valuation has been used extensively in the valuation of biological resources including
rare and endangered species, habitats and landscapes. Limitations arise in terms of the
information provision requirements necessary to allow respondents to value complex processes
or unfamiliar species or ecosystem functions. Nevertheless, the method has been extremely
useful in ex ante assessments of conservation policy and in ex post policy evaluation relating to
conservation (Willis et al., 1996).
Much controversy surrounds the use of CV when most of the value of the good derives from
passive use, as has been typical in litigation over the damages to natural resources and amenities
caused by releases of pollutants. Critics of contingent valuation allege that the quality of stated
preference data is inferior to observing revealed preferences, consider contingent valuation a
"deeply flawed method" for valuing non-use goods and point at the possible biases affecting
contingent valuation data. Despite these criticisms, CV has formed the basis for a significant
amount of policymaking in the United States (Cropper and Alberini, 1998).
1.2 WTP and WTA
Many ecosystem services are not traded in markets, and are not closely related to any marketed



purchases or actions. In these cases, surveys can be used to ask people directly what they are
2

willing to pay based on a hypothetical scenario. Alternatively, people can be asked to make
tradeoffs among different alternatives, from which their willingness to pay can be estimated.
The goal of contingent valuation is to measure the compensating or equivalent variation for the
good in question. Compensating variation is the appropriate measure when the person must
purchase the good, such as an improvement in environmental quality. Equivalent variation is
appropriate if the person faces a potential loss of the good, as he would if a proposed policy
results in the deterioration of environmental quality. Both compensating and equivalent variation
can be elicited by asking a person to report a willingness to pay amount. For instance, the person
may be asked to report his WTP to obtain the good, or to avoid the loss of the good. Formally,
WTP is defined as the amount that must be taken away from the person's income while keeping
his utility constant:

where V denotes the indirect utility function, y is income, p is a vector of prices faced by the
individual, and q and q are the alternative levels of the good or quality indexes (with q > q ,
0 1 1 0
indicating that q refers to improved environmental quality)
1

Willingness to accept for a good is defined as the amount of money that must be given to an
individual experiencing a deterioration in environmental quality to keep his utility constant:

In equations (1) and (2), utility is allowed to depend on a vector of individual characteristics
influencing the trade-off that the individual is prepared to make between income and
environmental quality. An important consequence of equations (1) and (2) is that WTP or WTA
should, therefore, depend on (i) the initial and final level of the good in question (q and q ); (ii)
0 1
respondent income; (iii) all prices faced by the respondent, including those of substitute goods or
activities; and (iv) other respondent characteristics. Internal validity of the WTP responses can be
checked by regressing WTP on variables (i)-(iv), and showing that WTP correlates in predictable
ways with socio-economic variables.
In theory, absent income effects and when WTP is a small fraction of income, WTP and WTA
for a given commodity should be approximately equal. However, a number of CV studies have
found that WTA is often much larger than WTP for the same commodity. Various explanations
are possible for this finding. One explanation is that the difference between WTP and WTA
depends on the elasticity of substitution between the commodity to be valued (a public good) and
private substitutes. The lower such elasticity, and the fewer the available substitutes, the greater
the difference between WTP and WTA (Hanemann, 1991). Another explanation - the theory of
prospects - is that individuals value losses more heavily than gains. It is also possible that
individuals react to their perception of who has the property rights over the commodity in
question. If the proposed policy contradicts their perception of the existing property rights,
individuals might express their rejection of the scenario through high WTA values. This might
happen if, for example, individuals believe that they are entitled to clean air, and are outraged at
a proposed degradation in air quality. In practice, some or all of these alternative explanations
may coexist. Carson (1991) suggests that WTP should be used whenever the individual might
incur benefits from the proposed policy, and Mitchell and Carson (1989) offer ways to frame the
3

payment question to elicit WTP. However, even when the individual might incur benefits from
the proposed policy, there are some scenarios under which the respondent may not overstate
WTA values (Cooper and Osborn, 1998).
1.3 Why do we need to make the value of biodiversity measurable in monetary
terms?
Many of the goods and services provided by biodiversity and ecosystems are crucial, but not
always quantifiable in monetary terms. Many of these goods and services are not traded in the
market place and so do not have an obvious price or commercial value. The danger is that if
these unpriced values are not included in the decision-making process, the final decision may
favour outcomes which do have a commercial value. Hence decision makers may not have full
awareness of the consequences for biodiversity conservation.
Natural resource management is an interdisciplinary field of study that considers the physical,
biological, economic and social aspects of handling natural resources. It involves putting
resources to their best use for human purposes in addition to preserving natural systems. Natural
resource managers' duties include overseeing workers, analyzing data, developing environmental
plans and policies in accordance with state and federal laws and negotiating land and resource
use contracts with landowners and governments.
The underlying question in natural resource management in Nepal is how to improve the
management of land, forest, and water resources in order to maintain both the productive
capacity and ecological functions of these resources which can value according to the
willingness to accept and pay mechanisms. Nepal is hardly the only country where improving
natural resource management is a development issue. However, during the past two decades
significant loss and damage to forests, soils, and riverine systems in many areas of Nepal have
led to widespread environmental damage and declining agricultural productivity, underscoring
the urgency to develop practical measures to reestablish a sustainable agricultural production
system without considering its value. Like in many low-income developing countries, the
degradation of Nepal's natural resources is closely tied to unrelenting pressure exerted on limited
arable land by a large and rapidly growing population, almost 90 percent of whom depend solely
on agriculture for their livelihood. This can only attract decision maker if appropriate valuation
method such as contingent or travel cost are applied.

2. CVM Design Technique:

2.1 Stated preference approaches
Stated preference approaches simulate a market and demand for ecosystem services by means of
surveys on hypothetical (policy-induced) changes in the provision of ecosystem services. Stated
preference methods can be used to estimate both use and non-use values of ecosystems and/or
when no surrogate market exists from which the value of ecosystems can be deduced. The main
types of stated preference techniques (Unei et al. 2010) are:
(a) Contingent valuation method (CV): Uses questionnaires to ask people how much they would
be willing to pay to increase or enhance the provision of an ecosystem service, or alternatively,
how much they would be willing to accept for its loss or degradation.
(b) Choice modeling (CM): Attempts to model the decision process of an individual in a given
context (Hanley and Wright, 1998; Philip and MacMillan, 2005). Individuals are faced with two
or more alternatives with shared attributes of the services to be valued, but with different levels
of attribute (one of the attributes being the money people would have to pay for the service).
(c) Group valuation: Combines stated preference techniques with elements of deliberative
processes from political science (Spash, 2001; Wilson and Howarth, 2002), and are being
increasingly used as a way to capture value types that may escape individual based surveys, such
as value pluralism, incommensurability, non-human values, or social justice (Spash, 2008).
As pointed out by Kontoleon and Pascual (2007), the main difference between CV and CM is
that CV studies usually present one option to respondents. This option is associated with some
(varying across respondents) price-tag. Respondents are then asked to vote on whether they
would be willing to support this option and pay the price or if they would support the status quo
(and not pay the extra price).i The distinction between voting as a market agent versus voting as
a citizen has important consequences for the interpretation of CV results (Blamey et al., 1995).
Steps for undertaking a contingent valuation study (Kontoleon and Pascual, 2007)
1. Survey design
Start with focus group sessions and consultation with stakeholders to define the good to be valued.
      
    
   



Decide the nature of the market ,i.e.,determine the good being traded , the status quo,and the
improvement or deterioration level of the good that will be valued.


 
pay for it, and who will benefit from it.
     
   -to-pay (WTP) or a
willingness-to-accept (WTA) scenario is presented).



-ended elicitation method).

2. Survey implementation and sampling

      -to-
face, mail, telephone, internet, groups, consider
inducements to increase the response rate.
5






3. Calculate measures of welfare change

 -ended  simple mean or trimmed mean (with removed outliers; note that this is a
contentious step).
 estimate expected value of WTP or WTA.

4. Technical validation
       
    

WTA) bids by estimating a bid function

5. Aggregation and discounting

      WTP over
relevant population  for example by
multiplying the sample mean WTP of visitors to a site by the total number of visitors per annum.


6. Study appraisal
e
estimates produced

2.2 The NOAA guidelines for contingent valuation

The US National Oceanic and Atmospheric Administration (NOAA) panel has offered a set of
guidelines on the CVM process. The recommendation was that these should be followed if CVM
is to provide information about non-use values of sufficient quality as to be usable as the basis
for claims for legal compensation for environmental damage (Arrow et al., 1993).
NOAA GUIDELINES

-test the survey instrument

-test any photographs used
over-estimate WTP)
glows (overstatement of WTP to appear generous)


-up questions to the valuation question
-tabulate the results

2.3 Types of Questions used in CVM Method (Kedir, 2011)

The form of the question for willing to pay or willing to accept can take one of the following
forms:
A. Open ended: in this format we ask the respondent to tell us how much he/she is willing to
pay for the provision under consideration This approach produces a continuous bid variable and
may therefore be analyzed using standard statistical techniques. Here some literatures say that
there is high degree of individual impreciseness, and sometimes systematic bias may be a
problem.
B. Take-it-or leave-it (dichotomous choice): This method was developed by Bishop and



format, where Yes or No is expected for the questions. The amount X is systematically stepped

ent bid levels. This approach produces a
discrete bid variable and requires sophisticated statistical techniques.
C. Double bounded dichotomous choice (with an iterative second round (double-bound)
question): for example if the respondent answers yes to the Rs X bid then they are asked if they
are WTP say Rs 2X (or Rs ½ X or 1/3 X if they answered No in the initial question).
D. Modified dichotomous choice method: Here the respondent was given a specified amount of
money randomly asked if they would be willing to pay. They were also given an opportunity to
bid an amount less or greater than the specified amount of money. Responses, therefore, could be
viewed as originating from either an open-ended or a closed-ended dichotomous choice-bidding
format. Unlike the discrete choice follow-up approach, this method can be
used in mail surveys.
E. Payment card method: payment card technique was developed by Mitchell and Carson
(1981) in order to avoid the starting point problem that can arise in traditional bidding
applications. Payment cards display a range of dollar values starting from zero and increasing at
fixed intervals. The respondent is asked to choose his WTP/WTA from these values. Sometimes
the payment values are three different starting values 300, 700 and 1000 as given in Figure

F. Iterative bidding games: this process is similar to auctions. In the first step the respondent is
asked how much he is willing to pay. The stated amount is changed iteratively until the highest
amount respondent is willing to pay/willing to accept is identified. The willingness to pay or



and socioeconomic characteristics. Such questions help the researcher identify the determinants
of the WTP/WTA. In Alberini et al. (1997), for example, the valuation questions were followed
    
    

health and pollution issues, his health history, and environmental quality in the home and at work
place.
3. Application of CVM in Nepal
In Nepal various contingent methods have been applied in different sectors such as health, food,
water supply and natural resources management. Here different case studies of only natural
resource management have been included.

Case Study 1
Tourists’ willingness to pay for entry fee in Langtang National Park, Nepal (Thapa K 2014)
Contingent Valuation (CV) method was
employed in order to explore the Willingness
to Pay (WTP) of foreign visitors for entry to
Langtang National Park, Nepal. A payment
card method was used to elicit the WTP of
visitors, which ranged from Zero to US$ 300
(and more). CV question was followed by the
     
willingness to pay (or not willing to pay) for
an entry fee. Face-to-face interviews (N= 187)
were conducted in Langtang in the autumn of
2013. Only foreign tourists were surveyed
because they were the ones to pay the highest
entry fee of NRs. 3,000. LNP is the first
Himalayan national park in Nepal established
in 1976 and covers 1710 sq km. Out of 187
respondents; only 145 expressed their WTP in monetary value, which was 77.5% of response
rate. The majority of the respondents (70%) were willing to pay more than the current entry fee
of US$ 30. Only 8% of the respondents replied that they did not want to pay any amount of the
entry fee and it was 17% of the respondents who were willing to pay less than the current entry
fee. Mean WTP was found to be US$ 63.59 (± 55.44) and median WTP was US$ 50. This
finding is similar to the previous Nepal Annapurna conservation area and chitwan
National Park where the visitors were willing to pay more than the existing entry fee (Baral et
al., 2008; Cook, 2011; Wrobel and Kozlowski, 2011). However, visitors stated certain reasons
for their willingness to pay for the hypothetical increase in the entry fee. In the fiscal year of
2011/2012, LNP generated US$ 351,930 from foreign tourists only in the form of the park entry
fees. 66% of the respondents are willing to pay US$ 50 or more. Given the hypothesized entry
fee and the prospective number of visitors willing to pay for this sum of money in LNP, US$ 50
could have generated US$ 466,400 which is the maximum revenue for the park that can be
generated than any other entry fee.

Case Study 2

Economic valuation of ecosystem services in protected areas: A case study from Nepal ( KC
et al 2010)
The survey was conducted with the users to know WTP for the sustainable use and management
of BBZCF as their conservation efforts with factors affecting their WTP while the visitors to
know their WTP for the recreational and aesthetic services and factors affecting their WTP.
Likewise, 4 events of focused group discussions (FGD) were conducted as part of qualitative and
in-depth group interview. Out of total users, 16% were willing to pay NRs. 5.05(US$ 0.07) and
less per HH per month, 50% in the range of NRs. 5.08  NRs. 50.14 (US$ 0.07 -0.69) per HH
per month, 13% were in range of NRs. 43.3  NRs. 100.28 per HH per month (US$ 0.69 1.38)
and remaining 21% were willing to pay more than NRs. 100.28 (US$ 1.38) per HH per month.
The mean WTP was NRs. 2.91 (US$ 0.04) per HH per month. According to the records of the
8
BBZCF, the total number of HHs was 956. Therefore, the projected average WTP by all the
users would be NRs. 2778.9 (US$ 38.24) per HH per month and NRs. 33346.81 (US$ 458.88)
per HH per year.
The tourists visiting the BBZCF were divided into three groups 1) Nepali 2) tourists from
SAARC countries except Nepal and, 3) tourists from other countries. The average WTP per
tourist per visit on the basis of different zones (1, 2 and 3) for recreational and aesthetic services
were US$ 52, 96 and 104 respectively. The average number of tourists on the basis of different
zones (1, 2 and 3) from the records (Fiscal Years: 2003/04  2008/09) of BBZCF Office were
8,237, 4,518 and 28,487 respectively. So, the projected average WTP on the basis of different
zones (1, 2 and 3) would be US$ 425,194, US$ 432,870 and US$ 2,948,405 respectively per
tourist per visit per year. Therefore, the total projected WTP by all tourists was found to be $
3,806,468 per year.

The contingent valuation survey was administered to 95 users and 100 tourists. For users, the
distance to forest, family size, nature of residence, gender and size of land holding seem to be the
prominent factors that affected upon their willingness to pay. The projected average willingness
to pay by all users for recreational and aesthetic services was NRs. 33,347 (about US$ 460) per
year.

Case Study 3
Contingent valuation of ecotourism in Annapurna conservation area, Nepal: Implications
for sustainable park finance and local development ( Baral et al. 2008)
To determine willingness to pay (WTP) for candidate
entry fees, contingent valuation surveys were
administered to 315 foreign visitors to the Annapurna
Conservation Area, Nepal, during April and May of
2006. The results of logit regression showed that the bid
amount, family size, visitors' satisfaction, the use of a
guide, and group size were the most significant
predictors of WTP. Results suggest that most visitors
would be willing to pay an entry fee considerably higher
than the current fee of 27 U.S. dollars (USD). The mean
and median WTP were 69.2 and 74.3 USD, respectively.
The most common explanation for WTP by respondents
was a desire to better protect the environment. The most
common explanation for unwillingness to pay was that
the bid was simply too expensive. Two models were
developed based upon different predictions of visitor
numbers (an optimistic case and pessimistic case) to
calculate the expected revenue production and likely
gross local economic impact of candidate entry fees.
Based on this analysis, we recommend an increase in the
entry fee to USD 50. In the optimistic scenario, this
higher entry fee leaves a budget surplus. In the
9

pessimistic scenario, it would reduce current budget deficits.

Case Study 4

Economic valuation of water supply service from two community forests in Palpa district
(Khanal et al. 2010)
Contingent valuation method was applied to evaluate the water supply service based on the
      
     
Jarneldhara CFs in Palpa district (surveyed during May-June, 2008) were used. Results indicated
that the mean WTP of Lipindevi Thulopakho and Jarneldhara CF users were US$ 36.62 and
25.62 HH- 1 yr-1, respectively. The economic value of water supply service from Lipindevi
Thulopakho and Jarneldhara CF were US$ 93.54 ha-1 yr-1 and 134.06 ha-1 yr-1, respectively.
Factors like distance of the house from water source, daily water consumption, wealth status and



Case Study 5

VALUING PROTECTED AREAS THROUGH CONTINGENT VALUATION:

A CASE STUDY OF CHITWAN NATIONAL PARK, NEPAL ( Cook J, 2011)
Using the contingent valuation method,
this research assesses the potential to
capture value from foreign tourists
traveling in the country. Tourists were
asked their willingness to pay for
conservation and environmental efforts
at Chitwan National Park, World
Heritage Site, and Nepal. The results
show that 71.5% of those who
responded were willing to pay more
than the current entrance fee of $7
USD (sample mean $21.94 USD). This
suggests that the current price of the
park entrance fee could be increased
with minimal negative results on
tourist numbers and that management
has the potential to capture the value
tourists already hold for Chitwan
National Park.

Case Study 6
ESTIMATING THE LOCAL COST OF PROTECTING KOSHI TAPPU WILDLIFE
RESERVE, NEPAL: A CONTINGENT VALUATION (Shrestha et. al 2007)
Estimation of the compensation required by the local communities to forego access to the
natural resources within the Koshi Tappu Wildlife Reserve (KTWR), Nepal using the contingent
10

valuation method (CVM). In addition to contributing a CVM application from a seldom studied
location to the literature, this case illustrates the sensitivity of WTA estimates to the analytical
technique adopted. It was analyzed household willingness to accept (WTA) compention
using Tobit and double-hurdle regression models that account for the censored distribution of
WTA and nested yes/no decision implicit in the WTA responses. The average WTA of a
household residing in the vicinity of KTWR is estimated to be US $238, which amounts to
nearly $ 1.64 million for the neighboring region.

Case Study 7

Potentiality of Payment for Environmental Services in

Community Forests of Nepal (Acharya et al 2010)
The study was carried out in six community forest user groups
(CFUG) of Lalitpur and Chitwan districts. The criteria and indicators
for selecting the CFUGs were based on their activeness in forest
management activities and the representation of environmental
services rendered. Moreover, consultations, especially with the DFRS,
District Forest Office, Chitwan National Park, and Non Governmental
Organizations (NGO) working in the districts were carried out for
selection of the CFUGs. High emphasis was given to represent
different categories of forests. The study used contingent valuation
method (CVM) to quantify the biodiversity conservation and water
regulation services. The study surveyed 102 persons for biodiversity
conservation. Among six CFs, only 4 CFs were selected to quantify
the biodiversity value of the forests. Two CFs were selected from each
terai and midhills region. Remaining two CFs were not taken into
account because they were less important from biodiversity
conservation point of view. Quantification for biodiversity conservation was calculated using
median value on the basis of willingness to pay (WTP) of CFUGs. Total WTP for biodiversity
conservation was found to be highest in Gyaneswor CF i.e. NRs 675,000 year‐1 followed by
Kumrose, Godavari and Saraswoti CF i.e. NRs 227,400 year‐1, NRs 24,000 year‐1and NRs
22,000 year‐1 respectively.
4. Advantages of the Contingent Valuation Method:
 It is very flexible which can be used to estimate economic value of about anything but
best to use it to estimate value of goods and services easily identified and understood by
users.
 CVM is the most widely accepted method for estimating total economic value including
non-use, opinion and bequest values.
 Extensively used for ecosystem damage assessments when there is human use or
knowledge of the ecosystem.
 A quick way to get an answer overnight
 Good point about CVM  you always get an answer!
11

 The nature of CVM studies and the results of CVM studies are not difficult to analyze
and describe.
5. Issues and Limitations of the Contingent Valuation Method:
• Asking people their willingness to pay (WTP) to maintain an element of biodiversity
elicits very different responses to those found when Willingness to Accept (WTA)
questions is asked. WTA significantly exceeds WTP.
• Hypothetical question produces hypothetical answer.
• CVM unreliable when commodity is unfamiliar to respondents ( Especially a problem for
non-use value)
• Expensive and time-consuming because of the extensive pre-testing and survey work.
• Some researchers argue that there is a fundamental difference in the way that people
make hypothetical decisions relative to the way they make actual decisions. For
example, respondents may fail to take questions seriously because they will not actually
be required to pay the stated amount.

6. Conclusion:
It is one of the widely used method for estimating non-use values which is flexible and works
best when estimating values for goods and services that are easily identified and understood by
users. However, it is an expensive and time-consuming method. It is also easy to value
everything, yet the results of valuation are not always useful or correct. CVM can be important
for decision makers in the areas of natural resource management of this country. There has been
various studies conducted in Nepal through contingent valuation method and are highly useful in
decision making process and valuation of any non-use values.